Saturday, April 4, 2015

Zoning regulations and the next generation of urban reforms

It is now well-known that restrictive zoning regulations - building height and land-use restrictions - constrain urban land supply, boost housing prices, and widen urban inequality. In fact, it is arguable that they are the most prohibitive of taxes faced by urban residents, especially migrants searching for affordable housing, and the most egregious of unearned rents, accruing to existing land-owners. Given that cities live and die by the quality of their migrants and widening inequality threatens to unravel its social contract, it is surprising that such policies do not get the level of attention they deserve.

In this context, The Economist has a nice essay illustrating the costs imposed by zoning regulations,

A 2005 study by Mr Glaeser and Raven Saks, of America’s Federal Reserve, and Joseph Gyourko, of the University of Pennsylvania, attempted to derive the share of property costs attributable to regulatory limits on supply. In 1998 this “shadow tax”, as they call it, was about 20% in Washington, DC, and Boston and about 50% in San Francisco and Manhattan. Matters have almost certainly got worse since then. Similar work by Paul Cheshire and Christian Hilber, of the London School of Economics, estimated that in the early 2000s this regulatory shadow tax was roughly 300% in Milan and Paris, 450% in the City of London, and 800% in its West End. The lion’s share of the value of commercial real estate in Europe’s most economically important cities is thus attributable to rules that make building difficult... the net effect of these costs is felt more by the poor than by the rich.

And its macroeconomic effects, in terms of higher rents discouraging migrants and displacing economic activity, are equally damaging,

Chang-Tai Hsieh, of the University of Chicago Booth School of Business, and Enrico Moretti, of the University of California, Berkeley, have made a tentative stab at calculating the size of such effects. But for the tight limits on construction in California’s Bay Area, they reckon, employment there would be about five times larger than it is. In work that has yet to be published they tot up similar distortions across the whole economy from 1964 on and find that American GDP in 2009 was as much as 13.5% lower than it otherwise could have been. At current levels of output that is a cost of more than $2 trillion a year, or nearly $10,000 per person.

As to its contribution to widening inequality,

In a recent paper Matthew Rognlie, a doctoral student at MIT, noted that the rising share of national income flowing to owners of capital, rather than workers, is largely attributable to increased payments to owners of housing. Capital income from housing accounted for just 3% of the total in 1950 but is responsible for about 10% today.

These regulations are impediments to India's urban growth, something that the country can ill-afford at this stage of its growth. In fact, given the population pressures and acute scarcity of vacant land, land has already become a binding constraint on the growth of cities. Cities are therefore left with no option but to go vertical or expand outwards. The former runs into the country's stringent height restrictions, leaving suburban growth, with all its damaging consequences, as the default option.

Instead of imitating older western models of expansive urban planning, India needs to embrace more utilitarian strategies that combine vertical growth with mixed use settlements and prudent deployment of green spaces. Permitting higher Floor Area Ratios (FAR) along important transit corridors, near transit stations, larger plots, and greenfield locations; encouraging vertical and mixed-use developments in blighted areas, complemented with affordable housing mandates; and incentivizing urban renewal by higher FAR and property tax concessions are possible strategies to manage sustainable urban growth. They should form the centerpiece of the next generation of urban reforms. The Government of India would do well to nudge and incentivize states and cities to embrace these reforms.